2015 (11) TMI 793 - AT - Income Tax

Disallowance of payment made by the assessee to the third parties - advances written off - case of the assessee is that it has established two companies, i.e., M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels Pvt. Ltd. for the purpose of borrowing funds from the market to expand the hospital of the assessee - Held that - The assessee has repaid the amount in excess to the amount borrowed from the two companies, namely, M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels Pvt. Ltd. to third parties on behalf of the two companies. We find that the assessee Malar Hospital is a different legal entity and M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels Pvt. Ltd. are two different legal entities. The amount disallowed by the Assessing Officer is not relating to the loan borrowed from the above two companies. The Assessing Officer has disallowed only the repaid amount to third parties on behalf of the two companies. Before us, learned counsel for the assessee has not been able to explain as to why the assessee has repaid the amounts to third party on behalf of the two companies. Learned counsel for the assessee says that the payment is made by the assessee in excess to the funds borrowed and therefore, there is an arbitration between the assessee and the two sister companies. When we specifically asked about the directors of the sister concern and the director of the assessee-company, learned counsel for the assessee has fairly accepted that both are one and the same. We find that the payment made by the assessee to the third parties on behalf of the two companies, i.e., M/s. Malar Finance Pvt. Ltd. and M/s. Malar Gautham Hotels P. Ltd. were not connected with the business of the assessee. Therefore, it is neither allowable under section 36(1)(vii) nor under section 37 of the Act. In view of the above, we find that the disallowance made by the Assessing Officer and confirmed by the learned Commissioner of Income- tax (Appeals) is correct and no interference is required. - Decided against assessee.

Issues:
1. Disallowance of advances written off as business loss.
2. Nature of advances and their treatment under the Income-tax Act.
3. Appeal against the order of the Assessing Officer and Commissioner of Income-tax (Appeals).
4. Legal entity distinction and repayment to third parties.

Issue 1: Disallowance of advances written off as business loss

The appellant, a hospital, filed its return of income admitting a loss. The Assessing Officer disallowed an amount claimed as "advances written off" in the profit and loss account, resulting in a loss. The appellant argued that the advances were in the ordinary course of business and should be treated as a business loss. However, the Assessing Officer contended that since the appellant was not in the business of money lending and the advances were for capital acquisition, they did not qualify as bad debts under section 36(1)(vii) of the Income-tax Act. The Assessing Officer disallowed the claim of Rs. 2,89,43,000.

Issue 2: Nature of advances and their treatment under the Income-tax Act

The appellant explained that two companies were formed to source funds for the hospital's expansion, and excess amounts were paid during repayments. The Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the advances were not business losses and were not connected to the appellant's liabilities. The Tribunal noted that the repayment to third parties was not related to the loans from the two companies, and the disallowed amount was not allowable under sections 36(1)(vii) or 37 of the Act.

Issue 3: Appeal against the order of the Assessing Officer and Commissioner of Income-tax (Appeals)

The appellant appealed the decision to the Tribunal, arguing that the excess payments constituted a business loss and should be allowed. The Departmental representative contended that the repayment was for capital acquisition, not related to the appellant's funds. The Tribunal found that the disallowance was correct as the payments to third parties were not part of the appellant's business activities, leading to the dismissal of the appeal.

Issue 4: Legal entity distinction and repayment to third parties

The Tribunal highlighted the distinction between the appellant hospital and the two companies, emphasizing that the disallowed amount was not connected to loans from the companies. The Tribunal found that the payments to third parties were not business-related and therefore not allowable under the Income-tax Act. The Tribunal dismissed the appeal, upholding the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals).

Conclusion:
The Tribunal upheld the disallowance of the advances written off as a business loss, emphasizing that the payments to third parties were not connected to the appellant's business activities. The appeal was dismissed, affirming the decisions of the lower authorities.

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